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Overview

CFA Society New York hosted its 2nd Annual Green Bonds Event on 3 May 2018. The main event was a panel discussion among Moderator, Heike Reichelt, Head of Investor Relations and New Products at the World Bank Treasury, and five panelists. Featured questions and topics included:

  • What is a green bond?
  • What projects are typically green?
  • Who issues green bonds?
  • Green bond investment themes
  • What’s next for green bonds?

Green Bonds Primer

By Jason Voss, CFA

What is a green bond?

The appeal of green bonds to buyers is that they can direct capital toward projects that may be in alignment with their values. From the perspective of issuers, given the purposeful interest of buyers, green bonds are frequently issued with lower yields than non-green bonds, thus saving interest expense. Furthermore, green bonds frequently attract a new cadre of investors to an issuer, thus deepening their investor community. Furthermore, green bonds carry a public relations benefit as firms strive to be identified as being on the “right side” of climate change.

Green bonds come in two varieties:

  1. Labelled – these bonds are certified as green meaning that the issuer has affirmed the proceeds raised in the issuance will be directed toward green projects, which consequently frequently have lower yields than their cousins…
  2. Unlabeled – bonds whose proceeds are not affirmed by an issuer as being earmarked for a specific green project, so yields are frequently higher.

Green bonds were first issued in 2007, and have been issued globally, though in North America they have not had the same level of success as in other markets, such as China. In the United States the largest ever green bond was Apple’s 2018 issuance of a $1.5 billion green bond with a maturity of seven years.

What projects are typically green?

  • Renewable energy – These are investments in projects in non-fossil fuel energy sources, such as solar, wind, hydro, biomass, geothermal, tidal, et.al.
  • Energy efficiency – Projects here include investments in equipment, systems, products and services that help reduce energy consumption per unit of output
  • Emissions reducers – Investments of this kind help to reduce greenhouse gas emissions

Who issues green bonds?

Governments, or companies that have an interest in green projects, as well as an interest in lowering their nominal interest rates. Examples include the Chinese government, City of Toronto, Bancocolombia, Toyota Financial Services, Fannie Mae, Bay Area Rapid Transit, and Apple.

Green bond investment themes

Panelists mentioned several different investment themes, including:

  • The aging of the populations of many top 10 GDP entities, such as the EU, China, and Japan.
  • Climate change and its attendant affects, such as destruction or reduction of land and real estate; destruction or reduction of crop yields; and migration triggered by climate change.
  • Investing in game-changing green technologies that promise to mitigate the effects of climate change.
  • Bonds that seek to address global income inequality.

What’s next for green bonds?

  • Though green bonds are a small proportion of total fixed income issuance, their share of total issuance is growing faster than the overall market.
  • Greater breadth and depth of green bond issuance by governments and businesses.
  • Greater dissemination of the green bond story to investors.

Key Takeaways

  1. Green bonds allow purchasers and issuers to align themselves in helping to mitigate climate changes.
  2. Green bonds typically reduce the interest expense of issuers.
  3. Green bonds help to attract monies to green opportunities in a focused way.
  4. The market for green bonds is growing faster than the overall fixed income market.

Other Resources

About the Speakers

Amy Hauter

Associate Portfolio Manager & ESG Research Analyst—Fixed Income, Brown Advisory; Co-Manager, Brown Advisory’s Sustainable Bond Fund

Guy Van Syckle CFA

Manager, Hannon Armstrong

Hervé P. Duteil

Managing Director, Chief Sustainability Officer – Americas, BNP Paribas

Sarah Wilson

Director, Responsible Investing, Nuveen, a TIAA company

Shellka Arora-Cox

Senior Associate, Norton Rose Fulbright

Heike Reichelt

Head of Investor Relations and New Products, World Bank Treasury